The price of oil makes the news on a regular basis. But, for Ohio, the price of natural gas is significantly more important.

First, a bit of history

It wasn’t that long ago that Ohio’s economy was threatened by high natural gas prices. Manufacturers and homeowners alike suffered under gas prices as high as $13 per mcf as recently as 2008. In comparison, over the past 12 months U.S. natural gas prices have ranged between $2 and $4 per mcf. And given the fact that midstream pipelines have not yet caught up with Ohio production, the price received by Ohio producers is even less.

Are low natural gas prices good news or bad news for Ohio?

All of this should be good news for Ohio businesses and residents – and it is, to a degree. In the world of supply and demand, however, when natural gas prices fall, less gas will be produced. And when prices get really low, the whole industry can slow dramatically.

Because Ohio is now a significant source of natural gas in the United States, low gas prices can have a negative effect on the Ohio economy. When prices get too low, exploration and production companies pull back on drilling, the companies that provide services to the E&Ps reduce operations, employees are laid off, and royalty owners (many of whom are in the poorer parts of the state) see their royalties reduced. The Goldilocks maxim (not too hot and not too cold) applies to the oil and gas industry in Ohio.

What are the variables that affect the price of gas?

Gas is not as easily exportable as oil, so the factors that affect the price tend to be more local. Perhaps the biggest variable is the weather. Cold winters and hot summers add up to higher gas prices. About 50 percent of U.S. households use natural gas for heating and cooling. Another factor is inventories. When the inventory of stored natural gas goes up or down, prices follow in reverse. The cost of production is a third factor. Producers of natural gas from shale formations, such as Ohio’s Utica formation, continue to become more efficient at acquiring increasingly larger amounts of natural gas from the shale. The industry in Ohio and all of the Appalachian Basin has responded to lower gas prices by decreasing the cost of production. That benefits consumers and producers alike.

Attached below is a chart prepared by Gordon Kristopher showing the changes in natural gas pricing since December of 2015 and offering explanations for why.